What’s with Washington State? Lessons for Ontario from a high-growth region

Continuing our ‘alternative measures of prosperity’ series, Washington State provides an interesting case study. When looking at our regular measure of prosperity – GDP – Washington outperforms the province significantly. This blog will explore how a region with many industrial similarities to Ontario enjoys a greater level of prosperity and productivity. What has Washington done to stimulate productivity growth? And, what lessons can Ontario learn from them?

Interestingly, the two regions have similar industrial compositions. For example, Ontario and Washington share a similar sized manufacturing industry, with Washington being home to a large aerospace sector and Ontario home to a large automotive sector. Further, both regions have a large professional, scientific, and technical services industry, which includes legal services, computer system design, architecture, and engineering, among other industries.

Washington outperforms Ontario in traditional measures of prosperity

Despite the similarities, Washington outperforms Ontario in almost every measure of economic prosperity. Washington’s GDP per capita grew by 14.7 percent between 2000 and 2015, rising to $77,248 (CAD) in 2015. In comparison, Ontario’s GDP per capita only increased by 8. 6 percent in that time, currently sitting at $55,340 (CAD). That is a significant $21,908 gap in GDP per capita between Washington and Ontario.

Washington is also home to five of the world’s top twenty ‘Most Admired Companies in 2016’ – Amazon, Starbucks, Costco, Nordstrom, and Microsoft — compared with Ontario who struggles to grow small- and medium-sized companies. Further, in both goods and service-producing sectors, Washington’s workers are 1.54 and 1.43 times more productive (GDP per hour worked) than Ontarians, respectively.

Washington outperforms Ontario in overall well-being scores

When looking at alternative measures of prosperity, as discussed in Working Paper 27: Looking Beyond GDP, Washington continues to outperform Ontario. The OECD calculates overall well-being by giving an equal weighting to each of the OECD’s 11 indices of regional well-being. The state received an overall well-being score of 7.85 out of 10 compared to Ontario’s 7.58. When we break down this score, we see that Washington outperforms Ontario in:

Income

Environment

Community

Jobs

Education

What is Washington doing to have such high growth?

In terms of policies, one of the main differences between the two regions is the tax structure. Ontario relies primarily on a relatively progressive income tax to fund its revenue stream. Washington, despite being considered a liberal and majority Democratic state, is ranked as the state with the most regressive taxation system across the entire US. With no personal or corporate income tax, Washington relies on sales and property taxes to provide the bulk of state revenue. The state levies extremely high sales consumption taxes on alcohol, tobacco, and gasoline. In Washington, the poorest 20 percent of residents pay 16.8 percent of their income on state taxes, compared to the top 1 percent, which pays only 2.4 percent of their income on state taxes. In Ontario, income taxes play a much larger role and are structured much more progressively.

Each region offers different incentives to businesses. Many of the incentives administered by the Ontario government are more favourable to smaller businesses rather than encouraging the development of any Fortune 100 companies. In comparison, Washington offers a large variety of tax incentives that encourage growth, mainly targeted at aerospace and high-tech industries. In 2011, it was estimated that Washington’s business incentive programs totaled $6.5 billion (USD). While the lack of income tax and high levels of tax incentives may encourage businesses to move to and grow in Washington, the poor contribute a large proportion of their income to the incentives offered to these industries.

Washington could learn some lessons from Ontario

Without deeper analysis, it is hard to come to any firm conclusions as to whether these tax incentive programs increase the well-being and prosperity of all of Washington’s population. But, by comparing Ontario’s tax system and well-being data, we can see that Washington and Ontario may define growth and prosperity differently. Ontario significantly outperforms Washington in health and safety – having a lower mortality rate, a higher life expectancy, and a lower homicide rate. Further, Ontarians enjoy a higher life satisfaction rate, a greater level of civic engagement, and less income inequality (as defined by the after-tax GINI coefficient).

Washington’s tax structure encourages growth and has been shown to work for growing and scaling businesses. But, there are trade-offs. As reported in Working Paper 27: Looking Beyond GDP, despite high economic growth being a primary goal, it is important to put all growth in the context of other aspects of life. Economic indicators can serve as one means of benchmarking, but social ones must not be ignored.

Data collected from Institute for Competitiveness and Prosperity analysis based on data from Statistics Canada, the US Bureau of Labour Statistics, and the OECD Regional Well-being Database.